Gucci
With Europe's uniform M&A proposal defeated at the hands of the Germans,
takeover rules in individual countries are perhaps more important than ever.
It took nearly three years for the battle for Gucci to subside, over Lebanese
food and LVMH champagne at the paris offices of the white-knight's counsel.
But it's likely that the innovative defenses and the rulings from Dutch courts
will serve as tea leaves to pour over for some time to come.

The
Players
Who represented whom in the three-way battle. Skadden and Wachtell are
across the table again in a takeover reminiscent of the good old days
in the U.S. of A.

"It's
very simple. If those guys don't pay, I'll cut their balls off and sue
them for specific performance." So said Domenico de Sole, chief executive
of Gucci.

And that's after all sides reached a settlement.

It took thirty months for Gucci to hand itself over
to its white knight and for its attacker to fold its tents and give up
the siege. It will take until the year 2004 for the peace treaty to take
its full effect, and, if Gucci's stock price remains high, Pinault-Printempts-Redoute
would never have to acquire an additional share to maintain control..
Over the two-and-a-half years of this fight between Pinault-Printemps-Redoute
and LVMH Moët Hennessy Louis Vuitton, Gucci defended itself with
an inventiveness that drew much interest, as well as some controversy
and judicial disapproval of both sides. The conduct of the battle and
the rulings from the courts in the Netherlands could well change the way
takeovers are conducted, both in that country and across the continent.
The rules of individual countries remain as important as ever, given the
recent defeat at the hands of the German delegation of the European Union's
proposal for a standard set of M&A regulations covering unsolicited
transactions.

Says Paul Storm, a senior M&A partner in the Rotterdam
office of NautaDutilh, who advised LVMH: "This is one of the first times
that a takeover battle has been taken to the Dutch courts and the very
first time that the inquiry procedure before the Enterprise Chamber has
been tried for such a case. For centuries, hostile battles have been frowned
upon in the Netherlands. But now the climate for takeovers will never
be the same. Already this summer, the Enterprise Chamber refused to allow
a white-knight construction. There will be many other cases that will
go to the courts."

On September 24, the Securities Board of the Netherlands
approved the agreement but insisted that, in addition to the strong contractual
protections already in place, Gucci post a letter to support a small portion
of the offer PPR is required to make in 2004. U.S. antitrust authorities
at press time had not yet spoken but were not expected to raise objections.
Says Wachtell's David Katz, counsel to PPR, Gucci's white knight: "It
will be one of the most interesting deals of the year. I do not think
that Europe has ever seen anything quite like this transaction."

Quirky
This fight involved a Dutch company founded by an Italian family fending
off a French conglomerate by turning to a French white knight, with the
contest ultimately adjudicated in the Netherlands. Gucci Group NV is incorporated
in that country but has almost no employees. It is a holding company that
for tax reasons owns all the operating companies of the Gucci group, each
of which has headquarters and operations around the world. As a Dutch
company, Gucci could have arrayed itself with a number of daunting defenses.

The Amsterdam Stock Exchange, which saw a market turnover
in 1999 of some EUR 1.5 billion, is a sophisticated market. Shares in
companies have been traded in the capital for four hundred years. Battles
for corporate control have always been frowned upon. Says Paul Storm of
Amsterdam's NautaDutilh: "Since the beginning of the twentieth century,
Dutch companies, including Royal Dutch and Unilever, have invented a wide
range of corporate devices to keep power essentially in the hands of management.
In listed companies, these devices are in fact protective devices against
hostile takeovers. Some of them have even been regulated in the Civil
Code."

A Dutch company can create a class of priority shareholders,
for example, a group that can virtually dictate the direction of the company
and assure its independence. This group can select members of both the
supervisory and management boards, decisions that require steep majority
votes of the general shareholders to overturn. Board members can themselves
own priority shares, although directors cannot own more than half of this
class of stock, under the rules of the Amsterdam Stock Exchange. Similarly,
if it is a legal entity such as a foundation that is the owner of the
priority shares, not more than half of the foundation's directors can
be members of the listed company's management board.

Priority shareholders can also be in charge of crucial
corporate resolutions. The company's articles of incorporation can require
that this class be the only one that can propose certain actions, or it
can decree that priority shareholders have a veto over those resolutions,
or both. "Such resolutions may include all the important ones--to amend
the articles, to issue shares, or to distribute dividends," explains Mr.
Storm.

A particularly popular defensive weapon is the so-called
"receiptization" of shares, which can mean that an acquiror buys all the
receipts and gets voting rights equivalent to as little as one percent
of the stock. A company issues shares to a legal entity, typically a foundation,
which then issues a depository receipt for each share. The foundation,
known as an "administratiekantoor" or AK, exercises the voting rights
of the stock and the owner of the receipt gets all the economic benefits.
Receipts may or may not be convertible into company stock, although as
prerequisites to listing receipts, the Amsterdam Stock Exchange requires
that they can in fact be converted into stock without undue restrictions,
and that the majority of voting rights on the AK's board be held by independents.

Says Mr. Storm: "Some thirty percent of all quoted
Dutch companies other than investment companies have in fact depository
receipts quoted rather than their shares."

Protective preference shares, known as "prefs," can
be fired from a company's cannons as soon as a hostile bidder appears
on the horizon. These shares yield a dividend at a fixed percentage and
only 25 percent of the nominal value must be paid up immediately, but
they carry the same voting rights as ordinary shares. Again, a foundation
is usually the entity to which such shares are issued, and it must conform
to stock exchange rules for the company to remain listed. But this is
a potent weapon: "When there is a threat of a hostile bid, the competent
body will issue such number of prefs as may be needed to prevent the predator
from acquiring a majority of the shares," explains Mr. Storm.

The exchange does not allow a company to have more
than two of these three defenses. When it decided to apply for a listing
on the New York Stock Exchange, the company decided not to arm itself
with any of these three defenses available to Dutch companies, fearful
that U.S. investors would not find it as attractive if it did so, despite
the fact that there are companies on the NYSE incorporated in the Netherlands
that do have the traditional arsenal of defenses available in their corporate
homeland. Before the battle was joined, Gucci had sought shareholder approval
to strengthen its takeover defenses but its efforts were narrowly defeated.

Gucci had no defensive weapons whatsoever, except two.

Battle Is Joined
On January 6, 1999, LVMH made its move. Advised among others by Marius
Josephus Jitta of Amsterdam's Stibbe, and Paul Kingsley of Davis Polk
& Wardwell, LVMH executives called Gucci to say that they had just
crossed the five percent disclosure threshold that triggered filing requirements
in both the U.S. and the Netherlands. Gucci CEO Domenico de Sole remembers
this first contact as a friendly call from a passive investor enamored
with the company. He got a second call from LVMH executive Pierre Godé:
"I asked him how much they owned and he said, 'I don't remember.'"

A week later, LVMH had 9.6 percent of Gucci stock,
having snapped up the stake that Prada, another Italian house, had bought
in the summer of 1998. When it filed its first 13D ten days after the
calls to Gucci, LVMH held a 26.6 percent stake, with purchases of ever-larger
tranches at ever-increasing prices. They ranged from 100,000 shares purchased
on January 5 at $55.84, to 631,000 shares bought on January 12 at $68.87
per share. By January 25, LVMH stood looming over its target with a total
of 34.4 percent. Not only did Gucci have no defenses--save the two it
would use later on--but also the Netherlands does not require a full tender
offer for all shares of acquirors who cross a given threshold, as is required
in Britain, Italy, and France.

LVMH said publicly and privately that there would be
no changes to management, and that it had no desire to take over Gucci,
but it did demand three seats on Gucci's eight-person supervisory board.
Gucci, alarmed at the prospect of a competitor owning so much of its stock
and worried for its minority shareholders, urged LVMH to make an offer
for all Gucci shares. LVMH refused. Gucci asked for a standstill agreement.
By February 16 advised by Martin van Olffen of Amsterdam's De Brauw Blackstone
Westbroek and Scott Simpson of Skadden's Canary Wharf office, Gucci sent
over a term sheet for LVMH's approval, released the next day, which guaranteed
Gucci's independence and limited LVMH's ownership stake. A letter from
LVMH CEO François Arnault stated that his company would agree "to
preserve the independence of Gucci's management" and that "all commercial
proposals by LVMH Group companies to Gucci . . . would be accepted or
rejected by Gucci on the basis of its best interest."

The very next day, Gucci issued a press release stating
that it had granted an option to a foundation under its control, the Stichting
Belangen Werknemers, to purchase 37 million newly issued shares. As part
of this employee stock-option plan, or ESOP, Gucci said it had just--at
company expense--issued to the foundation a total of 20,154,985 shares.
That was the exact number of shares now owned by LVMH. At a stroke, LVMH
found its 34.4 percent stake diluted to 25 percent of the company. Moreover,
should LVMH increase its stake, Gucci said it would issue more stock to
the ESOP on a share-per-share basis.

Because it had none of the other traditional Dutch
defenses in place, this was one of the two defenses it had left to it
under Dutch law. In 1995, the general meeting of shareholders had granted
to the supervisory board a five-year right to issue more of its own stock
to a separate legal entity under its control. The target had made a no-interest
loan to the ESOP to finance the share purchase. The ESOP would get dividends
on the stock but would use that money to pay down the principal, so that
the ESOP would not reduce earnings per share or affect Gucci's balance
sheet. They were not additional capital, but additional voting rights.
Says Mr. Storm: "The stated intention of the ESOP shares was to neutralize
the voting rights of LVMH's shares in Gucci."

Gucci had a rationale for its move. Its management
insisted that it was always amenable to a tender offer for all shares,
and was only trying to prevent an acquiror from taking it over without
making such an offer. Gucci could quickly shut down the ESOP, paying a
small premium to employees. Scott Simpson of Skadden's London office,
advisor to the target, explained that all of the defenses would collapse
in the face of a bid for all the stock. That was very important to the
board of Gucci, he said, because the company wanted such a bid to remain
feasible.

Gucci did not think of the ESOP or Stichting over a
few days in the winter of 1999. It had in fact been examining the possibility
of such a defense since the previous summer, when it suspected that Prada
might be on the prowl. Gucci general counsel Alan Tuttle--who, along with
Gucci CEO de Sole, had been a partner at Washington, D.C.'s Patton Boggs
before joining the company--asked Skadden's Scott Simpson for advice.
Simpson suggested using an ESOP. Gucci's Dutch counsel De Brauw Blackstone
Westbroek examined the plan, pointing out that Dutch corporate law generally
prohibits a company from financing the purchase of its own shares. However,
the Netherlands firm noted, this rule did not apply to ESOPs.